Wild Improvement Continues for Leading Economic Index In November 2011

The November 2011 release The Conference Board’s Leading Economic Indicator (LEI) values show the economy is and will be growing.  They say the prospect of a recession in the near term has receded.

Says Ataman Ozyildirim, economist at The Conference Board: “November’s increase in the LEI for the U.S. was widespread among the leading indicators and continues to suggest that the risk of an economic downturn in the near term has receded. Interest rate spread and housing permits made the largest contributions to the LEI this month, overcoming a falling average workweek in manufacturing, which reversed its October gain. The CEI also rose on improving employment and personal income although industrial production fell in November.”

Says Ken Goldstein, economist at The Conference Board: “The LEI is pointing to continued growth this winter, possibly even gaining momentum by spring. For the second month in a row, building permits made a relatively strong contribution and there is a chance that the long decline in housing is finally slowing. However, this somewhat positive outlook for the domestic economy is at odds with a global economy that appears to be losing steam. In particular, a deeper-than-expected recession in Europe could easily derail the outlook for the U.S. economy.”

This leading indicator is used to predict growth over the coming six months. The LEI increased 0.5% in November.

On the other hand, ECRI’s WLI (which Econintersect reports on weekly) is negative indicating a contracting economy six months from today. Further ECRI issued a recession “call” stating that the USA economy will begin contracting before the end of the 1Q2012 – in direct contradiction of the LEI.

Econintersect believes the USA economy is currently weakly expanding, but our forecast only looks ahead one month (analysis here).

Caveats on the Use of the Leading Economic Index (LEI)

This index is produced by The Conference Board (a private money making company) – who charges for the details of the indices they publish. Its designed to predict economic growth over the next six months.

This is not a “black box” economic forecasting index as The Conference Board publishes the components.

This index is based to a large extent on monetary measures which have been extraordinarily manipulated by monetary policy to stimulate the economy. For this reason, the hyper-values produced by this index are not necessarily linked to any real economic dynamics – and likely are causing erroneous readings.

Many of the index components are linked to indices which have significant backward revision – making real time forecasts problematic. Further, a portion of the data is not available when the index is originally published. In short, the index is constantly revised – and eventually will be correct – just not in real time. The Conference Board’s statement:

To address the problem of lags in available data, those leading, coincident and lagging indicators that are not available at the time of publication are estimated using statistical imputation. An autoregressive model is used to estimate each unavailable component. The resulting indexes are therefore constructed using real and estimated data, and will be revised as the unavailable data during the time of publication become available.

The index does not adjust for inflation or population growth.

Econintersect does not believe this index is properly indicating the current economic dynamics. At times, The Conference Board Economists “talk down” the hyper values claiming it is showing only moderate or slight growth. However, it is also argumentatively true, that the LEI trends down historically before the starting date of recessions – and this index is currently in rocket ship mode.

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